Though the first link states that the average urban wage in China is about $3,000 a year, my sources in China report that a college-educated worker makes about $6,000 a year--about one-eighth the average U.S. income of $49,777. A mid-level manager might make $12,000 a year--an excellent salary in China.

Food eats up (sorry) about 40% of the average household budget in China, roughly in line with the percentage U.S. households devote to housing/mortgages. As I have noted here before, it's not the absolute percentage rise in essentials such as food and energy that matters, it's the relative impact on lower-income households that matters.

A 10% rise in food prices in a household that spends 10% on food (a typical upper-middle class U.S. household) results in a "statistical noise" 1% increase in the family budget. In a family budget with 40% devoted to food, a 10% increase in food meaningfully crimps household spending. A doubling of food prices would be catastrophic.

The roots of China's inflation are visible to all: huge increases in bank credit and lending, and massive speculative flows into real estate:

Industrial-output growth accelerated to 13.3 percent last month from a year earlier, exceeding economists’ median estimate of 13 percent.

Urban fixed-asset investment also grew at faster pace, climbing 24.9 percent in the first 11 months of 2010 from a year earlier, the report showed. Retail sales gained 18.7 percent in November from a year earlier.

The Shanghai Composite Index of stocks has fallen 10 percent from a Nov. 8 high, extending this year’s loss to 13 percent, on concern tighter monetary policy will cut economic growth and profits.

Food prices rose 11.7 percent in November from a year earlier, the most in more than two years, and residence-related costs such as charges for water, electricity and rent were also a key driver of inflation, the statistics bureau said today.

Broad money supply, or M2, rose last month by 19.5 percent, the fastest gain in six months, the People’s Bank of China reported yesterday. M2 has surged 55 percent over the past two years and outstanding yuan-denominated loans have climbed to 47.4 trillion yuan, 60 percent more than in November 2008.

We recently spoke at length with a young Chinese friend who travels extensively in China in his engineering/design job. He reported that prices for some food items have doubled and tripled practically overnight. That suggests the official estimates of food inflation are lower than the reality facing consumers.

He bought two designer-label business suits here in the U.S. because he said they were half the price he would have paid in China. And yes, the suits were made in either China or another low-cost Eastern Asia nation.

How can workers making $6,000 a year afford food and other consumer prices that are higher than prices paid by Americans making 8 times as much? Even our Chinese friends are mystified how the average (low-wage) household manages.

One answer is that housing is often dirt-cheap in China. As part of the privatization/opening of the economy process in the early 1980s, Chinese families were able to buy a 99-year lease on their residences for very modest sums. There is no property tax in China, though authorities there are trying to impose them for the first time to dampen speculation.

So families who still live in their old 1980s-era housing pay virtually nothing in housing costs.

Everyone who can work does work in Chinese households, and so the household income often includes three or even four incomes (Grandmother or Grandfather might be receiving a government pension, or might generate income in the informal economy).

Most Chinese workers pay no income tax, so whatever they make, they mostly keep.

Despite these pluses, inflation is now so high that it has overtaken these built-in advantages.

The central illusion in the Chinese economy is that the Central State can effectively control it. When China's economy was smaller and simpler, that was possible. Now there are far more nodes of power and control, and the Central Government's control over regional and local government borrowing and spending is more nominal than absolute.

There are powerful, conflicting mixed signals throughout the Chinese economy.The Central government is certainly aware of the economy overheating, and it is making modest efforts to dampen lending and speculation by increasing bank reserves and raising interest rates.

But at the same time, its targets for local government growth--growth at any cost-- remain high, meaning the incentives and directives are still in place to build, build, build as a way of generating all-important growth and revenues.

Local governments remain dependent on land and development fees for fully 40% of their income, so slowing down real estate speculation would spell fiscal doom for local governments.

Add these factors up and it's easy to see why empty malls and towns continue to get built, regardless of final demand. The truth is that the Chinese economy is heavily dependent on massive credit and lending expansion, fixed-investment (in factories, power plants, etc.) and real estate.

In other words, it is the acme of a speculative economy. Though certain aspects of the economy are resilient, others are increasingly fragile and extended.

Rampant growth has led to increasing complexity and obscurity. The policy modifications imposed by the central government authorities have had effectively zero effect on runaway lending and speculation. That is painfully clear evidence that the authorities have lost control of the economy.

Many observers seem to see China and the U.S. as players in a zero-sum game: if one gains, the other loses. I think that is an inaccurate model; the two gain together from each other's stability, and lose together if either one is destabilized.

That's why we should hope that China's leaders manage to eliminate the mixed signals that are exacerbating the credit/inflation/speculation bubble that is threatening to destabilize their nation.

We have our own destabilizing problems, and a loss of U.S. stability is certainly not China's gain, either.

Special note: Once again I find myself so sorely pressed for time and energy that I am unable to respond to all emails. Please know I read all emails, but I can only devote a very limited number of hours to this blog and all related correspondence. That leaves me with a deeply vexing and unsatisfactory choice: if I devote those few hours a day to responding to email, then I have no time left to write the blog. Without the blog, then there is nothing to write me emails about, so both vanish. My own core energy is heavily depleted by this constant struggle, which leaves me unhappy and feeling that I have failed my readers no matter what I do.

For better or for worse, most of my time is spent pursuing the sort of self-reliance that I promote here. I find it a peculiar conundrum that the only way I can possibly manage my correspondence would be to sacrifice the very practices which form the heart of this site and my purpose in creating it.

Unfortunately, I don't have a fixed income, pension, grant or trust fund, so nobody pays me to answer hundreds of emails. I have to make enough money in the real world to pay our health insurance, property taxes, income taxes, self-employment taxes, dental bills, etc., and have time to nurture my own network of friends, associates and family, cook 95% of our meals at home, take care of the fruit trees, garden, bicycles, etc. and have some time to devote to fitness, music and my other writing/books in progress.

I regret these limits but even workaholics have limits, and they bear down harder with each passing year. I feel old and tired much of the time, and that's not sustainable.

So please do not consider it a slight if you receive no acknowledgement; I read and value each email, as I know it comes from a real individual with pressing demands of their own. This entire enterprise, if it can be called that, is imperfect, and will always be so. I keep it afloat, but barely. That's the best I can do.

I have added a new forum to Daily Java, for comments on non-financial topics discussed here.

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